Nine S&P 500 Poor Performers Poised To Rebound

The S&P 500, up more than 22%, has been one of the best performers over the past year among the major stock indices. But that doesn’t mean that all of its component stocks have fared well.

In fact, as investors seem to be getting increasingly nervous about the stock market, when a big-name stock falls short of expectations, or gets out of favor with Wall Street for some other reason, it tends to get crushed. As a result, a number of S&P 500 stocks are down more than 20% over the past 12 months.

I looked at the bottom performers in the index over the past year, and the ones discussed below all appear to have significant rebound potential for those investors willing to bet against the crowd. They all have solid business franchises, and several of them have powerful brand names as well.

ADT has a long history of market leadership in home and business security systems. But it also has a history of ownership changes, most recently being spun off by Tyco in October 2012, and so management has been distracted.

In addition, the entry of cable television operators has provided a new source of competition. Last January, ADT's stock swooned nearly 17% on a disappointing earnings report.

Management appears proactive, releasing solid new products and entering promising partnerships with Ford, McAfee and State Farm. And cash flow appears ample to cover debt expense, which has increased with borrowings used, in part, to fund share buybacks.

Bed Bath & Beyond stumbled in early 2014 when it appeared that the retailer’s growth momentum might be stalling. On January 9, the stock fell 12% following an earnings report; another 6% slide followed on April 10 as same store sales softened. The retailer had been a general beneficiary of the improving economy and a specific beneficiary of the housing recovery, and I expect those trends to resume.

Coach, probably the world’s most recognizable brand in premium leather goods, is seeking to find the right design/price-point combination as it expands the brand into clothing and other accessories. A new CEO, promoted from within, took over in January, and Coach is now transitioning to a new designer. The turnaround initiative includes closing some retail locations and moving out old inventory, and so the next quarter or two may offer more disappointing news.

But expectations have been lowered, as has the valuation of the company, and so any positive surprises should generate significant appreciation. And with more than three times as much cash as debt, there is little balance-sheet risk.

Diamond Offshore Drillingis one of the leading offshore oil drillers. The whole sector has been weak in recent quarters as the worldwide energy market undergoes some changes, but its long-term potential remains strong as there is an ever increasing demand for fossil fuels around the world. Diamond’s capital structure is sound, and the stock is likely to rebound nicely when drilling picks up again.